Inflation Continues To Be A Party Pooper

Moody’s Investors Service has slashed India’s economic growth projection to 8.8 per cent for 2022 from 9.1 per cent earlier, citing high inflation

Headline equity benchmark indices Nifty 50 and Sensex staged a decent recovery over the second half of the fortnight, recording gains of 3.22 per cent and 3.61 per cent, respectively. The BSE Mid-Cap index also closed in the green territory with gains of 1.68 per cent. BSE SmallCap index ended on a flat note, marginally up by 0.06 per cent. According to data released by the Ministry of Commerce, India’s inflation based on the Wholesale Price Index (WPI) hit 15.08 per cent in April, the highest mark since September 1991. Inflation was driven higher in April because of an across-the-board increase in sequential price pressures.

The inflation index demonstrated double-digit growth rates for the 13th month in a row. During the fortnight the Union Government announced a series of changes to the tax structure levied on crucial commodities in a bid to curb the high inflationary pressure on the economy. Finance Minister Nirmala Sitharaman announced a cut in excise duty on petrol and diesel by ₹8 and ₹6 per litre, respectively. The government has waived customs duty on the import of some raw materials, including coking coal and ferronickel, used by the steel industry.

The move is aimed at lowering costs for the domestic industry. Also, to increase domestic availability, the duty on exports of iron ore has been hiked up to 50 per cent. The export duty on a few steel intermediaries has also been raised to 15 per cent. The above measures being implemented are not in favour of metal and steel makers. The introduction of the steel export duty stands to significantly affect the sector’s export goals at a time when the domestic industry was planning to leverage heavy capital expenditure to enhance production capacity amid China’s moves to dissuade steel exports.

India exported nearly 15 per cent of the total steel output in FY22. BSE Metal index lost 2.19 per cent during the fortnight. On the flip side, the cost pressure on automakers is expected to ease following the potential softening of steel prices along with duty cuts by the central as well as several state governments on fuel. This may lead to a material upswing in gross margins for automakers, which have contracted over the last few quarters due to the unprecedented rise in commodity prices across the globe. India’s second-largest IT services company, Infosys has recently announced the reappointment of Salil Parekh as its Chief Executive Officer (CEO) and Managing Director (MD) for a five-year term ending March 2027.

BSE IT index was the top loser of the pack, recording losses of 2.25 per cent. Over the fortnight, JP Morgan analysts have downgraded India’s IT services industry to ‘underweight’, citing soaring inflation, supply chain issues and the hit from the Ukraine war that are expected to bring an end to the growth boom the industry enjoyed during the pandemic. JP Morgan expects the slowdown to worsen in 2023 partly due to a potential decline in orders from the key market of United States, where economic growth has started to dwindle.

 Also, industry margins are expected to be narrow in the coming quarters because of the ongoing talent war that has pushed up costs of hiring and retaining employees. Moody’s Investors Service has slashed India’s economic growth projection to 8.8 per cent for 2022 from 9.1 per cent earlier, citing high inflation. They have however maintained their 2023 growth forecasts at 5.4 per cent. As per the ratings agency, while India’s highfrequency indicators point to an improving momentum in the first four months of this year, the rise in crude oil, food and fertiliser prices will weigh on household finances and spending in the months ahead. Trading data shows that FIIs were net sellers over the fortnight to the tune of ₹21,089.96 crore while DIIs were net buyers to the tune of ₹20,730.54 crore.